The government’s introduction of a tax-free savings account (TFSA) in January 2009 was welcome news, as it improves Canadians’ ability to save for the future, tax free. For 2018, the annual contribution limit is $5,500, with the limit for future years indexed to inflation and raised in increments of $500, as required. This gives many Canadians room to build their savings on a tax-free basis.
Above all, a TFSA is designed to help Canadians save money, whether their financial goals are short term or long term. To help you make the most out of the benefits available from a TFSA, here are some essential facts.
Key facts about TFSAs
- Eligibility: To open a TFSA, you must have reached the age of majority in your province. As a resident of Canada, your contribution room has been accumulating since 2009 for every year that you were 18 years of age or older. The current annual contribution limit is $5,500.
- Contributions: TFSA contributions are not tax-deductible (you cannot deduct them from your income on your tax return) but all investment growth (capital gains, interest, dividends) remains tax-free.
- Withdrawals: TFSA withdrawals are tax-free and funds can be used for any purpose. You can re-contribute funds withdrawn in the same year if you have the available contribution room. Otherwise, contribution room is restored the following calendar year.
- Unused contribution room: You can make TFSA contributions up to the annual contribution limit. Any unused contribution room carries forward indefinitely. In addition, any amounts withdrawn from your TFSA can be re-contributed in a future year without affecting new contribution room.
- Investment types: Any type of investment eligible for an RRSP (guaranteed investment certificates, mutual funds, stocks, bonds and certain shares of small business corporations) can generally be held in a TFSA.
- Federal credits and benefits: Neither income earned within your TFSA nor withdrawals will impact your eligibility for federal tax credits or income-tested benefits such as the Canada Child Benefit, Old Age Security or Guaranteed Income Supplement.
TFSA tips for investors
Here are two tips to keep in mind when it comes to contributing to TFSAs:
- The earlier, the better. By contributing the maximum amount to your TFSA every year, you will optimize the earning potential by allowing your investment income to grow and accumulate tax free.
- Be strategic about asset location. Minimize taxes by assessing your portfolio holdings and the most efficient location for those assets.
- Watch TFSA contribution limits. Overcontribution may lead to tax surprises. An MD Advisor can help ensure that you maximize benefits without taking unnecessary tax hits.
TFSAs can offer valuable benefits to all Canadian investors. You can find out more about TFSAs if you have further questions.